State job-creation incentives fall short – again

In February 2014, Gov. Jerry Brown’s administration unveiled an Economic Development Initiative to replace an enterprise zone program that had fallen out of favor after nearly three decades. Enterprise zones offered tax incentives to promote the starting of businesses in areas with high unemployment, but many analyses concluded they didn’t have a substantial positive effect. Now a centerpiece of Brown’s replacement initiative is offering up similar mixed-to-poor results.

The California Competes program was initially billed as providing $180 million through the end of fiscal 2014-15 for tax credits to lure businesses to the Golden State or to keep them from leaving. As the Sacramento Bee reported at the time, emergency regulations were hastened into place to get the program up and running.

Panorea Avdis, the chief deputy director of the Governor’s Office of Business and Economic Development, justified the move in a memo obtained by the Bee: “This program must go into effect immediately to help minimize the migration of business to other states and to encourage growth and expansion in this state.”

Four and a half years later, the sense of urgency among Brown aides about getting California Competes started is hard to square with its disappointing results. A recentLegislative Analyst’s Office report offered many criticisms:

– Slightly more than a third of awarded credits – 35 percent – went to companies that primarily competed with other California businesses, meaning the credits create no additional economic activity, lead to an unfair competitive advantage for firms getting the credits and consume state resources that could have been use for constructive purposes.

– There were no metrics to judge the effectiveness of the remaining 65 percent of credits, which went to companies that sold goods or services both in California and out.

– The size of the hiring and investment commitments the companies made per $100,000 of tax credits has declined steadily in recent years, reflecting a lack of enthusiasm about the value of the credits.

– The interest in the program had waned among small businesses, which had 25 percent of available annual tax credits set aside for their use. The LAO noted that in the last fiscal year – 2016-17 – only 49 percent of the credits were awarded, or about $30 million.

LAO says close program, but role in Amazon bid may provide cover

“The executive branch has made a good-faith effort to implement California Competes, but the problems described above are largely unavoidable,” the LAO wrote. “We recommend that the Legislature end California Competes. In general, broad‑based tax relief – for all businesses – is preferable to targeted tax incentives.”

Because the program loses its authority to grant tax credits at the end of fiscal 2017-18, the LAO report may shape the Legislature’s and the Brown administration’s decision on what to do about California Competes. The LAO says if the program is retained, its eligibility rules should be tightened up and other provisions should be revised to make it more likely the credits go to companies facing competition from rival firms in other states.

But at least until Amazon makes its decision on where to locate its second North American headquarters, the LAO’s call to shut down California Competes is unlikely to be heeded. In October, some $200 million over five years in California Competes funding was listed as the single biggest incentive to get Amazon to build its second home in California – topping the long list of tax and regulatory incentives that the Brown administration offered Amazon as enticements.

If California Competes is eventually shuttered, some state politicians are likely to strengthen their calls for the full revival of another economic development program shut down at Gov. Brown’s behest – redevelopment. In theory, redevelopment takes a portion of incoming local government revenue and directs it to projects with the promise to improve the local economy or to provide needed facilities.

Critics of redevelopment say it has a long history of being used for crony capitalism in California and that the diverted revenue often goes to cover routine City Hall expenses. But former Los Angeles Mayor Antonio Villaraigosa has made reviving redevelopment a key focus of his 2018 gubernatorial campaign, arguing that it is essential to building more affordable housing and responding to California’s housing crisis.

6 comments

The key metric is this: How many additional jobs were created for CA-located companies that primarily do business in other states? A proper study would take the favored companies and compare them with a carefully matched control group NOT receiving the subsidy. As a percent of the previous year’s workforce, how many additional hires occurred in each group?

I conjecture — indeed, I GUARANTEE — that the cost per job “created” by the subsidy would turn out to be absurdly high. Sadly, government seldom does this type of analysis — unless it’s a rigged liberal academic “study” (a.k.a. a con job).

BTW, I would expect California bureaucrats in charge of this giveaway to select companies (like Amazon) that will be increasing their workforce for more fundamental economic reasons. Such a biased selection would make the program appear more successful than the actual subsidy justifies.

California Competes will never be able to overcome California entangles. Look at their target audience, jobs in low income area meaning hourly blue collar jobs. The competing states likely have much lower power and energy costs, lower worker’s compensation costs, don’t have lawyers recruiting workers on how to sue their employers, aren’t looking at a $15 hourly wage for new untrained employees in the next few years, don’t have a regulatory quagmire and a system of enforcers ready to pounce on business interest and the list goes on and on.
The amount of money offered in a program like is a drop in the bucket compared to extra overhead businesses are subjected to for being located in the Golden State. It would make much more sense for the state to minimize read tape that leads to delays in housing construction and generate more blue collar jobs that way.

These “job programs” are designed to help politicians and government bureaucrats who hand out the tax goodies, not the poor taxpaying citizens or underemployed Joe Median worker.

If you want more jobs, just stop the delays and denials by our bureaucratic and political rulers. For example, a proposed desalinization plant in Huntington Beach has been in the “permit phase” for 14 years while a huge number of the educated elite (bureaucrats, experts, lawyers, lobbyists, interveners, and politicians) have been earning large amounts for over a decade working on the paperwork. Meanwhile, the “Joe Median” type workers who would build, operate and maintain the facility have seen their incomes stagnate. All this money transfer to the educated elite will be funded by the average citizens on our water bills as we transfer more wealth to the “connected” political and bureaucratic elites.

Another example, So. Calif. has the best open-ocean environment in the world for off-shore aquaculture (fish farming) with good water depth, no hurricanes, or NW Pacific storms. Long Beach Aquarium did a study showing a billion dollar/yr business opportunity just providing fish to our huge population along with 10,000 or so jobs replacing some of our huge seafood aquaculture imports. Our politicians and bureaucrats keep saying we need this development but have blocked all attempts to create these jobs while increasing the number of jobs for themselves.

Eliminating the bureaucratic blocks and delays to job creation and innovation are the keys to economic growth and new jobs, not subsidies to the existing cronies. But subsidies to cronies benefit the connected political elite and will remain.

The state has many more problems than this failed program. The regulatory environment in this state is not one that encourages companies to either start of stay in California. IMO the current far left political environment will not attract business men who are more conservative or at least middle of the road. The anti-2A legislative agenda also will not be favorable for any business in the hunting / fishing industries. The sanctuary city / state issues will eventually hurt as well, especially after the verdict today. Lastly, our extremely high taxes will not gather much favor by individuals or businesses to come or stay in this state.

Chris Reed

Chris Reed is a regular contributor to Cal Watchdog. Reed is an editorial writer for U-T San Diego. Before joining the U-T in July 2005, he was the opinion-page columns editor and wrote the featured weekly Unspin column for The Orange County Register. Reed was on the national board of the Association of Opinion Page Editors from 2003-2005. From 2000 to 2005, Reed made more than 100 appearances as a featured news analyst on Los Angeles-area National Public Radio affiliate KPCC-FM. From 1990 to 1998, Reed was an editor, metro columnist and film critic at the Inland Valley Daily Bulletin in Ontario. Reed has a political science degree from the University of Hawaii (Hilo campus), where he edited the student newspaper, the Vulcan News, his senior year.
He is on Twitter: @chrisreed99.